Lead Story… I came across a story from the Seattle Times this weekend that reminded me of perhaps the most obvious sign that a real estate market has overheated: Flipping. First off, not all flipping is created equally and there are two primary categories of flippers:
- Fix and Flippers: This type of real estate investor looks for bargain properties that need some work, completes improvements – cosmetic or otherwise and sells…hopefully at a profit. The flipper calculates what they can likely re-sell the house for, how much money they will need to spend on upgrades and repairs and what profit margin they need to make and bids on the subject property accordingly. It’s a legitimate business that is highly reliant on execution rather than purely market direction.
- Speculators: As the name implies, this type of flipper is extremely reliant on the direction of the market. Speculative flipping is a pure risk play with little to no skill required other than filling out a contract (and possibly a loan application) which is often done with the help of a realtor anyway. A speculator puts a new home or condo under contract before it is complete, waits for the market to go up and sells at a higher price. Builders often offer lower prices in the early phases of a project in order to generate sales momentum and raise them incrementally in later phases. Speculative flippers hope to capitalize on that momentum as well as an upward-trending market. This type of flipping was made popular during the housing bubble, and returns were often juiced with a BS subprime loan that had a low teaser payment, the potential for negative amortization, and little to no documentation. There isn’t any real business plan here as the speculative flipper isn’t adding any value whatsoever to a brand new property. There are only three outcomes here. When the market goes up, you make money. If the market doesn’t move, you lose a little bit of money (after sales and closing costs are accounted for) assuming that you can sell in a timely manner. If the market goes down, you lose your ass, especially if other flippers in your condo development or subdivision are present and flood the market with inventory as conditions are softening.
This brings us to Seattle and it’s white hot market. It’s been well-noted that Seattle is one of the top-performing housing markets in the US. Back in May Curbed posted a story about how the average Seattle listing sells in a mere 8 days. News outlets in the Pacific Northwest have also run stories about people camping out to reserve downtown condos. All that considered, the story from the Seattle Times about how flippers in a downtown condo called Insignia were making flip profits on homes that had never been occupied was somewhat surprising as I can’t recall seeing this sort of thing since the mid-aughts:
Just how hot is the Seattle real-estate market? People are now reserving condos under construction and then flipping them for a six-figure profit before they even open.
Matt Goyer, a local real-estate broker and blogger, combed through some recent sales at the new Insignia high-rises in the Denny Triangle. He found several brand-new condos that their owners reserved during construction over the last couple of years and just sold again before ever living in them.
The condos fetched an average of $637,000, up from their original purchase price of about $526,000 — a profit of 21 percent.
That’s pretty good money for a speculative play with no value add component whatsoever even after sales commissions and closing costs are taken into account. I have to admit that I was somewhat relieved when I went to Matt Goyer’s blog referenced above to find out a few more details. The good news is that this isn’t rampant. There were only a hand full of speculative flips out of the 348 units in the project:
The North Tower of Insignia has now closed 207 of 348 units with 130 left to close and only 11 left to sell. We’ve seen a handful of resales come up in the North Tower were people are flipping their units, having never occupied them. Curious about this we decided to dig in more and found only four flips so far which feels like a low percentage overall.
402N – Pending. Listed for $629,500. Originally bought for $516,000.
503N – Sold for $629,950. Originally bought for $530,000.
808N – Pending. Listed for $649,950. Originally bought for $534,000.
905N – Pending. Listed for $639,000. Originally bought for $525,000.
And here’s a look at the South Tower, though some of these are legit resales where folks lived there and then decided to sell.
209S – Sold 4/19/2016 for $680,000. Originally bought for $587,600.
405S – Sold 2/22/2016 for $730,000. Originally bought for $646,500.
511S – Sold 5/21/2016 for $794,000. Originally bought for $705,000.
1601S – Sold 3/21/2016 for $795,000. Originally bought for $695,200
1706S – Pending. Listed for $1,119,800. Originally bought for $1,032,900.
1802S – Sold 3/19/2016 for $915,000. Originally bought for $844,000.
1907S – Pending. Listed for $1,415,000. Originally bought for $1,291,290.
2107S – Sold 2/27/2016 for $1,350,000. Originally bought for $1,249,800.
2207S – Sold 2/23/2016 for $1,358,000. Originally bought for $1,259,800.
3806S – Sold 4/18/2016 for $1,750,000. Originally bought for $1,611,540.
Still, this is the type of activity that can spread quickly when word of flipping success gets out and people start talking about it at cocktail parties. As stated earlier, speculative flipping takes requires little-to-no skill set, only enough cash for a down-payment and some large huevos. So, is this a big issue? Of course not, at least currently. Fortunately, we are not seeing much evidence that this sort of thing is rampant and a small hand-full of units in a high-end Seattle condo project are not much reason for concern. It does bear monitoring though if speculative juices start flowing more broadly again…..
Momentum: A second straight month of strong job gains has re-framed the economic outlook as the Federal Reserve continues to ponder what to do next.
Catch Me If You Can: Roughly 16% of the 43MM Americans who have student loan debt are in long term default. The federal government is locked in a battle to get them to pay with taxpayers are on the hook for the $125 billion that they owe.
Anything That Isn’t Nailed Down: Central Banks are now starting to buy corporate bonds as they search for ever-more unconventional ways to spur growth.
Going Hungry: Farmland just experienced it’s first decrease in valuation since 2009 as corn and soybean prices extend their slumps.
Haves and Have Nots: Downtowns throughout the rust belt and parts of the northeast are increasingly becoming a center of economic growth at the expense of close-in suburbs.
Hitting a Different Target: DR Horton designed it’s entry level Express line to appeal to Millennial first time home buyers. However, downsizing Baby Boomers seem to like it a lot as well.
Solar System: Can Tesla go from a luxury car company to a one-stop-shop clean energy empire?
The Science of Speed: What’s behind Usain Bolt’s record setting runs? It’s not that he goes faster than other runners but rather that he doesn’t slow down as quickly once he reaches peak speed.
To the Moon: Seattle is becoming the Silicon Valley of space start-ups.
Chart of the Day
Verified: A new study based on Facebook profiles just confirmed every cat person stereotype you can imagine:
After analyzing the aggregate, anonymized data of about 160,000 U.S. users who’ve posted photos of dogs and/or cats, Facebook found that dog-posters tend to be more extroverted, more upbeat and luckier in love than their feline-photographing friends. Meanwhile, cat people tend to be single, to express a “wider range of emotions” (including, chiefly, exhaustion and annoyance), and to harbor an unusually strong interest in fantasy, anime and science fiction.
High Voter Turnout: Because what wealthy town wouldn’t want their mayor involved in a meth-for-sex bust?
Dumpster Diving: Philadelphia has a problem with residents renting dumpsters to use as neighborhood swimming pools in it’s streets, causing the city to issue a statement telling them to knock it off. If you have ever known any Philadelphia Eagles fans, this will make perfect sense.
Landmark Links – A candid look at the economy, real estate, and other things sometimes related.
Visit us at Landmarkcapitaladvisors.com